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Framework for SMEs emphasizes relevance, historical costs

As David Morgan revealed some of the specific principles that will be
contained in the proposed Financial Reporting Framework for Small and
Medium-Sized Entities, one common theme emerged.

“We don’t get into a lot of things that we don’t consider relevant,”
Morgan told the audience Monday at the AICPA fall Council meeting.

Morgan chairs the task force that has joined AICPA staff in
developing the framework. The special-purpose framework is designed
for small and medium-size entities that are not required to produce
financial statements prepared in accordance with U.S. GAAP.

The proposed framework, which is expected to be released as an
exposure draft before the end of October, was formulated to provide
users of financial statements with the information they need without
unnecessary disclosures. Under the framework, financial statements are
expected to be easier and less costly to prepare.

“It’s a reliable framework,” Morgan said. “It’s being subject to
professional scrutiny [through an exposure process], and most of all
we think it will make it easier for the bank to use these financial statements.”

The proposed framework will blend traditional accounting methods
with accrual income tax methods. It also attempts to minimize the
number of adjustments accountants have to make to reconcile their
financial statements to their tax returns.

Historical costs—rather than fair value—are emphasized in the
proposed framework, which is expected to be released as a final
document in the second quarter of 2013.

In addition, the proposed framework will:

Retain a traditional approach to lease accounting.

Allow entities to follow the taxes payable method when
accounting for income taxes, thereby mirroring what’s reported on an
entity’s tax return.

Not include the concept of other
comprehensive income.

Not include the concept of
variable-interest entities.

To support the framework’s implementation, the AICPA is
developing a number of resources and tools. The framework, which is
expected to be just around 200 pages, will be accompanied by a
companion volume when it is issued as a final document next year.

CPE, conference sessions, and webinars are being scheduled, and the
AICPA is developing turnkey toolkits for CPAs to take to their
clients—and the users of their clients’ financial statements—to
explain how the framework can meet their needs. The AICPA is counting
on its members to help the framework gain acceptance and also plans to
reach out to user groups such as banking organizations.

Morgan said the project is aligned with the AICPA’s objectives as a
service organization because it facilitates more efficient financial reporting.

“This framework will allow cost savings,” Morgan said. “You won’t
have to put so many resources behind financial reporting. It will be
less complicated. And I think for these types of business, it will
have much more relevant accounting principles.”